Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 85-99)




  85. Can I welcome you to the Committee for the second session of our inquiry. Can I ask you to identify yourselves for the record.
  (Mr Soare) Thank you, Chairman. I am Vernon Soare, the Policy and Technical Director of the Chartered Institute of Public Finance and Accountancy, known as CIPFA.
  (Mr Bilsland) Good evening. I am Christopher Bilsland, CIPFA Council Member and also Vice-Chairman of CIPFA's Public Finance Committee. I am also County Treasurer at Somerset County Council.
  (Mrs Wellen) I am Maureen Wellen, Policy and Technical Manager at CIPFA with responsibility for capital and treasury management.

  86. Thank you. Do you want to say anything by way of introduction or are you happy for us to go straight to questions?
  (Mr Soare) Only just to say, Chairman, that obviously the things we put into our written evidence focus on areas where we have some concerns or would like to see some changes. In general we welcome the Bill but I think we do say in our introduction that we are still disappointed that the balance of funding issue still seems to be where it has been for a while.

Mr Betts

  87. We have just heard from the Local Government Association that the key issue for them is this matter of prudential guidance and the sense of the Bill is that it is very much down to yourselves as you are writing the Code of Practice. Could you tell us a little bit about how you think that is going to work and when will the Code be ready?
  (Mr Soare) If I can ask my colleague, Maureen Wellen, to take that question because Maureen has been quite closely involved with the development of the Code.
  (Mrs Wellen) Thank you, yes. CIPFA is developing and maintaining the Prudential Code as a professional Code of Practice underpinning the new system. Essentially in the new system local authorities are going to be responsible for taking decisions on how much they can afford to borrow and, therefore, taking their own decisions with respect to their capital investment and their capital programmes. The purpose of the Code we are developing is to support the local democratic decision making by ensuring that certain matters are taken into account during those decisions. Firstly, that local authorities need to have regard to their strategic plans, their asset management planning and option appraisal and so will have an impact on service delivery. Secondly, to make sure that in taking those decisions they take into account all of their assets and all of their liabilities, and that is very crucial to making sure they get proper decision making. Thirdly, and crucially, the Code will require them to set prudential indicators that will show that their decisions are affordable in the short and medium term, in the long-term sustainable, or if they are not will demonstrate quite clearly that they are not. That is the purpose of the Code.

  88. Can I just give as an example a local authority which comes along and decides whether it is going to invest in a new school, clearly there are tests about whether it can afford the investment, etc., a new school is needed, but it is also going to have to test, is it not, about how it goes about raising the funding for that project, is it going to borrow through traditional routes or is it going to go for a PFI scheme? Is your Code going to deal with that sort of issue or are you assuming that those sorts of decisions are going to be taken by Central Government and local authorities basically are going to be pushed in the direction of one form of capital arrangement or another?
  (Mrs Wellen) The Code will support a framework where local authorities take their own decisions and it will ensure that matters are taken into account so that they will be able to take a firm view as to which offers best value. However, depending on the method by which Central Government gives support to local government, and given that Central Government support is a matter that local government will obviously have to take into account in taking these decisions, even after the Bill is passed the Government will have that potential to steer local authorities down particular routes if they wish to. For the prudential system to work as fully as it could it will need to be operated in tandem with a different type of support mechanism from Government that also supports freedom of choice as between options.

Sir Paul Beresford

  89. You have touched on what seems to me to be one of the nubs of the stranglehold that the Government has got. On the one hand they say they are going to be free to borrow and on the other hand they are going to have to be prudent, they have to look at their revenue, they are looking at trying to predict over 20 or 40 years of borrowing but that is in the hands of the Government, it is not predictable. So if the Government squeezes the revenue they are caught short.
  (Mr Soare) In general we would agree with that. I think we tried to say in our written evidence that it is very important that the draft Bill looks at the capital and the revenue together and in a sense does not separate them either intentionally or otherwise.

  90. So the Government is flag waving freedom at the top but has a double-barrelled shotgun under the table pointing at the knees?
  (Mr Soare) Maybe as a professional body we would not want to say yes to that but I think what you are describing—

  91. That will be the trend along the way, you think?
  (Mr Soare) A freedom under the Prudential Code to manage your own shop in terms of capital investment is not a freedom if you have not got the revenue support behind it. In a technical sense, yes, that is exactly right.


  92. When will the Code be ready?
  (Mrs Wellen) We have a timetable that is based on it being ready for 1 April 2004 which is, we are informed, the first possible date that the system could be ready to go.

  93. Why should it not be ready for the Bill itself in the autumn? Surely if you are going to legislate for a Code, Parliament has a right to see the Code at the point it legislates?
  (Mrs Wellen) At the point of legislation there will be a very firm draft available for consultation in accordance with the final timetable. Parliament will see a final draft. If there was a need to accelerate the process we would need to go back and have another look at our timetable, but that is the timetable that we are currently working to.

  94. If you are going to have something that is fairly clear for Parliament to look at, why are you then going to take possibly another 18 months getting the final Code into place?
  (Mr Soare) I think the issue is a draft of the code has been published and we are road testing it currently, piloting it with a number of authorities of different types to make sure that it works. In terms of our timetabling, we will do what it takes to have it in the state that Parliament requires at the time legislation is passed. In terms of the gap, the 18 months I do not think is significant in terms of we will not be developing it right up until the last moment.

  95. If you are developing it, you are changing it, are you not, therefore Parliament, in a sense, will be giving you a blank cheque. Now why should Parliament trust CIPFA when it does not trust all sorts of other groups outside with codes of practices?
  (Mr Soare) Because I do not think it is a blank cheque. A lot of what we are proposing has been aired publicly already. There has been a lot of consulting with a number of other bodies including the Audit Commission and the LGA. There is a lot in the public domain.

  96. How will Parliament be able to stop you changing the code of practice after the Act is in place?
  (Mr Soare) I think technically if the Bill refers to the CIPFA prudential guidelines as being the authoritative statement, in one sense Parliament is placing a lot of trust in CIPFA, and we acknowledge that, so it is possible technically that we could put through some changes but, as I say, any changes that we propose would be widely consulted upon, including with the relevant Government department.

Mr Betts

  97. You are doing all this hard work and getting this wonderful new code for local authorities to operate. Now the Secretary of State comes along with Clause 4, does that not completely undermine the whole thrust of developing prudential guidelines?
  (Mrs Wellen) The Government has always indicated that if it does give these freedoms to local authorities it will wish to have a reserve power. It has always said it is very much a reserve power and I think the test will be in how it operates. Also, the White Paper did give certain conditions that it was felt that the reserve power wished to be used for whereas the current draft of the Bill as worded would allow for it to be invoked in any circumstance. I think we would agree with other commentators that it would be a good idea for the current draft to be constrained, particularly where the decision is for a Secretary of State determination.

  98. Have you a form of words for the amendment that could be put in?
  (Mrs Wellen) I rather like the form which was in the White Paper. It said broadly if a local authority had not set a prudential limit or had breached it.

  99. Can we move on to another issue and that is the minimum level of reserves and Clause 25 is saying these will be specified now in the legislation. I gather you are not too keen on that idea.
  (Mr Soare) I think on that particular issue, the background and context is quite important here. I think the latest Audit Commission figures which have come out show that approximately 90 per cent of local authorities have adequate balances, the other ten per cent are judged by the auditors to have inadequate balances. However, when you look at the pattern of local authority spending, although in terms of a range, depending on type of authority, between 20 to 40 per cent of local authorities do overspend at individual directorate levels in year, virtually none of the local authorities actually end up having to reduce services as a result, i.e. they have enough in balances to cover those in year differences against actual and budget. It is in that context, I think, that we come at this particular point and say there is not a general problem. There are some well publicised problems for a very small minority of local authorities but the vast majority do manage very prudently. When we come to the issue about reserve balances it is in that context, specifying reserves and balances, what we say is it is a very local decision and judgment as to at what level balances should be set. We are revising guidance issued in 1995 and we believe the vast majority of local authority treasurers already demonstrate their prudence in this area. To have a central setting of a minimum balance does seem to us to miss out the link of the local knowledge, the local factors. Perhaps I can ask my colleague Chris Bilsland to say something from a practitioner's point of view.
  (Mr Bilsland) Yes. It is not just that it is not needed, it is difficult, also, to see how it could be put into practice. Inevitably when Government set figures by form then figures produce the lowest common denominator. I think as Vernon just said you really need a personal knowledge of the local authority to decide what is the right sort of level of balances. If I take my council, for example, one of the issues I deal with at the moment is cases which go to the Lands Tribunal. We have four cases and those figures can be anywhere between £1,000 and £4 million. I know precisely what figure to put into the county council's accounts to provide for what the Lands Tribunal might say, I know that from taking evidence from a half a dozen different places: the legal advice, history, the degree of difficulty settling the claim. It is very difficult to say how that sort of thing can be legislated for. Two councils side by side could be in quite different positions year by year. At the end of the day not only is it the case, as Vernon said, that there is not really any evidence to say there is a need for this legislation, the reality is that it is one of those areas where really you need to take the decision as locally as possible to get the best possible decision.

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